Image courtesy Steve Crane
My recommendation to investors keen on emerging markets is South Africa. I believe they should diversify their South African investment slightly by investing 50% in a JSE index fund, and 50% in specific industries. An investment in a JSE index fund will capture the steady growth of the country. They should use a graduated investment strategy, where every 2 years, depending on shifts in the economy, they consider significant changes not only between JSE and specific areas, for example, shifting to 30% in JSE and 70% in specific industries, but also between specific industries. Right now, they should invest more heavily in manufacturing and education. Over time, they will likely need to shift a slightly greater share of funding into the retail and telecom industries.
Within manufacturing, the biggest opportunity lies in advanced manufacturing. In the estimates discussed in the McKinsey Global Institute Report, in a previous posting, the authors argued that South Africa can triple its exports by expanding manufacturing in three separate niches: 1) machinery, equipment and appliances; 2) motor vehicle and transportation equipment; 3) chemicals. I believe the greatest opportunity is in the automotive space. A separate McKinsey article on where global growth will come from, the authors explain that the greatest emerging market opportunity will come from the automotive sector. Not knowing which area will expand the most, an investor should spread out investments across the industry. In 2017, General Motors disinvested in its South African plant. I think investing in one company is too risky for this reason. However, the wider industry is promising. Jason Woosey, editor of IOL Motoring, explained in a 2017 article that even with GM’s departure, “South Africa’s car manufacturers exported a record 344,822 vehicles last year [2016], and NAAMSA [auto association] expects that number to be improved upon this year, by up to 10 percent…” The top exported vehicles were the Mercedes-Benz C-Class, Volkswagen Polo, and the Ford Ranger. The last one is the most intriguing. Investors should put slightly more money in Ford’s operation for two reason. Ford has been ratcheting up its operational investment, so they are a rare firm ready for the emerging trend, and production throughout the continent for several years and particularly in South Africa. Vehicles like the Ford Ranger are attractive for the regional market, especially given its more agile performance in commonly rugged Sub-Saharan African terrain.
Additionally, I investors should put money in education. According to a 2015 BCG publication, teachers in South Africa are notoriously bad. 60% of math teachers fail tests for the level of math they teach. A WEF rating ranked South Africa 144/144 for math and science education. Despite the public sectors inability to provide adequate education, learning will need to come from somewhere. With manufacturing growth, education demand will likely rise. This demand will be driven by required training for manufacturing jobs and by more kids being sent to better schools by families with more disposable income. Three listed companies lead the market for private education and therefore seem best prepared to take advantage of growing education demands. They are Curro Holdings, Stadio, and Advtech.
In future 2-year intervals, as investors consider implementing a graduated investment strategy, they should be looking particularly at growth prospects in retail and telecom. These industries are in consideration not only because of opportunity in South Africa, but also because South African retail and telecom giants are the biggest players in Africa. This is relevant because manufacturing is likely to expand throughout the continent in the coming decade, according to Irene Yuan Sun. In her article and book, The Next Factory of the World, she explains that manufacturing, combined with encouraged African trade, is creating a promising future for the continent. She explains that as of 2015, over half of African countries having joined the Tripartite Free Trade Area, making it the 13th largest economy in the world. As more Africans have more income, the stage may be set for South African retailers and telecom companies to profit. The three retailers on my short list are Shoprite, Pick n Pay, and Woolworths. Vodacom and MTN are the two telecom companies I’m keeping my eye on.
Africa is the next frontier. Based on IMF data for 2018, 20 of the 35 fastest growing countries were from Africa. By implementing on my recommendation, investors will capitalize on Africa’s growth. They will do this by taking advantage of opportunities in Africa’s second biggest and most stable economy. As a new leader steps up to take the helm for five years, I expect him to clean up corruption and get the country back to a high growth trajectory. Investments will benefit from three segments of growth. It will benefit from national growth through the a JSE index fund. It will benefit from a wave of manufacturing, especially form automotive companies like Ford, and education, especially from private education companies. Finally, it will benefit from pan-African expansion via South African telecom and retail companies which are the largest players on the continent. South Africa, I believe, will provide investors the type of expected return over ten years that matches a medium-high risk profile, optimizing balance between stability and growth.